Quick questions on The effects of exchange rate movements on the Australian economy: appreciation, depreciation and the J-curve (HSC Economics Topic 2)

The J-curve effect describes the DELAY between a depreciation and the trade-balance improvement it is expected to produce.

A weaker AUD makes Australian exports cheaper in foreign currency (more price-competitive) and imports more expensive in AUD terms. Foreign buyers purchase more Australian exports; Australian buyers purchase fewer imports. Over time, export volumes rise and import volumes fall, so net exports (and BOGS) improve.

The mirror image: exports become more expensive in foreign currency and less competitive; imports become cheaper in AUD, so Australians buy more of them. Export volumes fall and import volumes rise, worsening BOGS.

Whether a depreciation actually improves BOGS depends on how RESPONSIVE trade volumes are to the price change. The Marshall-Lerner condition states that a depreciation improves the trade balance only if the SUM of the price elasticities of demand for exports and imports exceeds 1. If combined demand is too price-insensitive (elasticities sum to less than 1), the unfavourable price change dominates and the trade balance would actually worsen.

A weaker AUD raises the AUD price of imported fuel, consumer goods and intermediate inputs. This pass-through reaches the Consumer Price Index (CPI) with a lag of roughly 2 to 4 quarters. If the Reserve Bank is already targeting inflation within its 2 to 3 percent band, this can constrain its ability to cut the cash rate, or force it to hold or raise rates, even when domestic demand is otherwise soft.

A stronger AUD lowers the AUD price of the same imported goods. The RBA estimates that a 10 percent appreciation cuts headline CPI by roughly 1 to 2 percentage points over about 1 to 2 years, giving the RBA more room to hold or cut the cash rate.

"A depreciation raises inflation" is weaker than "imported inflation passes through to CPI with a lag of about 2 to 4 quarters (RBA)". Keep the cash rate (around 3.6 percent, mid-2026, illustrative ExamExplained) and the AUD/USD range (about USD 0.62 to 0.70, 2024-26) ready to cite.